Stock Market Appears Unfazed
By Fed Decision; Bonds Surge
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
The old economy still fears the Fed, but the new economy apparently
doesn't.
That was one lesson that many investors were drawing from the stock
market's relaxed reaction to the Federal Reserve's boost in interest rates
Wednesday, which was accompanied by a strong hint that more rate
increases are coming.
Meanwhile, the 30-year Treasury bond had one of its strongest one-day
rallies in recent years, but for reasons that had little to do with the Fed
move. The bond rally, which pushed the yield below 6.3%, was driven by
an unexpected announcement from the Treasury Department that it would
cut back on future bond issuance as a way of reducing the federal debt.
The Dow Jones Industrial Average fell immediately on the Fed
announcement, then rose and finally finished down a moderate 37.85
points, or 0.34%, at 11003.20. Financial stocks such as American Express
and J.P. Morgan fell, as did some industrial stocks such as International
Paper and Minnesota Mining & Manufacturing. A retreat by stocks is what
would be expected in a world of rising interest rates, which make
economic conditions more difficult.
But many of the new-economy technology stocks in the Nasdaq
Composite Index gained ground despite the news. The composite itself fell
sharply at day's end from its highs, but still finished up 21.98, or 0.54%, at
4073.96. Qualcomm, Yahoo! and JDS Uniphase posted big gains, as did
America Online, which trades on the New York Stock Exchange.
One of the more violent moves came in the bond market, where the
30-year bond's rally totaled almost two points, or approaching $20 per
$1,000 bond. Its yield, which moves inversely to price, plummeted to
6.28% after having threatened to rise above 7% in recent weeks.
Traders said bond activity, especially in the 30-year bond, was driven not
by the Fed announcement but by the Treasury Department's unexpected
announcement. Some of the stock gyrations may have been caused by
confusion over the bond activity, traders said. The dollar was mixed.
As for the stock gains, "Right now, people have their hands over their eyes,
saying, 'It looks good to me,' " said Henry Herrmann, chief investment
officer at mutual-fund group Waddell & Reed in Overland Park, Kan. "I
don't know that I believe that the stock-market resurgence is sustainable,"
he added, given that the Fed's "message is that they are going to raise rates
again."
Since June, investors have shrugged off a succession of four Fed rate
increases. They may have believed that the rate-increase cycle wouldn't
last much longer, or that corporate earnings would grow even with higher
rates. On both the New York Stock Exchange and the Nasdaq Stock
Market Wednesday, more stocks advanced than declined.
But since the succession of rate increases began, old-economy and
new-economy stocks have behaved very differently. The Dow industrials'
close Wednesday was little changed from the 10970.80 at which it closed
on June 30. Under the pressure of Fed rate boosts, the blue chips have
gone nowhere.
But the Nasdaq composite has soared 52% since June 30, when it closed
at 2686.12. Even within Nasdaq, new stars have clearly outpaced the old
leaders. Microsoft, Cisco Systems and Intel all fell Wednesday despite the
index's rise. Since June 30, Microsoft is up 11%. Qualcomm has almost
quadrupled; Oracle has almost tripled; JDS Uniphase has almost
quintupled.
The late-day stock sag, which pulled even the Nasdaq composite down
from its highs, left some investors wondering whether even the highfliers
now might take a breather. The Dow industrials still are down 4% for the
year, but the Nasdaq composite is up marginally and is less than 4% below
its Jan. 21 record close of 4235.40.
Many traders and investors say they are "baffled" or "dumbfounded" at the
ability of favored, often Internet-related stocks to soar despite the rate
increases. Higher interest rates in past years have been especially bad news
for the most expensive stocks. And while the Fed didn't explicitly say that it
will raise rates again, that is what investors concluded from its comment
that inflation remains the main threat to the economy.
"I think it would be very healthy for the growth stocks that have been doing
so well lately to pause," said Richard Unruh, chief investment officer for
stocks at Philadelphia asset-management group Delaware Investments.
"And looking at the technical side of the market, there are signs that that
has happened," he added. Even after rebounding for the past two days,
Qualcomm, for example, still has fallen sharply since early in the year. It is
20% below its high close, which occurred on Jan. 3.
"We could go sideways here for a while, and maybe down," Mr. Unruh
said.
Added Michael Clark, head of U.S. stock trading at Credit Suisse First
Boston, "The market still has to digest its gains of November and
December. That will take another four to eight weeks."
He added that the Fed meets next month, and that investors may soon
begin worrying about the risk that it will raise rates another quarter-point
then.
But who knows? The Qualcomms and Oracles could take off again.
Investors' mutual-fund money, Mr. Unruh said, has been flowing strongly
into funds that buy companies -- especially tech companies -- that are
expected to grow rapidly. Fund buying for "just about everything else
turned negative at the start of this year," he said, meaning that mutual-fund
investors were pulling money out of most funds. "But not growth; it is still
very clearly positive."
Aside from the 30-year Treasury, government bonds had a quiet day.
Bonds and interest-rate futures already are priced as if the Fed is going to
raise rates two or three more times, by a total of half a percentage point or
three quarters of a point, said Mark Mahoney, Treasury market strategist
at Warburg Dillon Read. Bond investors saw Wednesday's Fed
announcement as being in line with that expectation.
Outside the U.S., stocks advanced in dollar terms. The Dow Jones World
Stock Index, excluding U.S. stocks, rose 2.7 points to 184.49.
Write to E.S. Browning at jim.browning@wsj.com |
